Deloitte has struck a cautious note over proposals for a Europe-wide ‘bad bank’ for non-performing loans (NPLs).
In its new report Shifting Momentum: Regulation driving change in European loan portfolio markets, the Big Four auditor argues that centralised bad banks have historically proven useful – particularly in Asia and Europe – for early adopters.
“However,” it warns, “they are expensive and operationally complex to establish – and typically take two years to start delivering according to their mandate.
“So to push forward with a central bad bank, there has to be a clear, underlying rationale for why recoveries will be enhanced through the [bad-bank] structure versus the status quo.”
In the auditor’s view, combining loans from different European jurisdictions does not appear to provide that rationale.
It notes that, as the process of setting up country-specific bad banks is “currently highly problematic” in light of State Aid regulations, it looks as though the proposed solution “is now part of history” for the European banking sector.
Unless, that is, the European Council’s plans to develop an asset management company (AMC) blueprint for the proposed bad bank “somehow manage to overcome this obstacle”.
Regular readers of The Treasurer’s online output will remember that we reported on the bad-bank proposals in February this year, when they were first raised by European Banking Authority (EBA) chair Andrea Enria.
Speaking at a Luxembourg seminar on risks in the banking sector, Enria noted: “The average [NPL] coverage ratio in Europe is 44%, or 60c on euro book value. The market price is around 20c. It is this steep, bid-ask divide that is blocking the secondary market for NPLs in Europe.
“If there was an efficient secondary market for NPLs, their real economic value would move to 40c.”
Explaining why the AMC-style bad bank should be formed with member states’ funding, he said: “You need the public sector to bridge the gap between the inefficient secondary market today and an efficient secondary market tomorrow.”
While fellow speaker Klaus Regling – head of the European Stability Mechanism – welcomed the concept, he highlighted the “sheer complexity and size” that the bad bank would need to have to effectively fulfil its duties.
In its report, Deloitte suggests that a parallel European initiative to enhance the quality of NPL data is “more interesting” than the bad-bank plan.
It says: “The EBA will be at the forefront of these developments, which will include not only the development of standardised NPL templates for data submission, but also an attempt to utilise this data to create some form of more automated trading in NPLs through the establishment of transaction platforms.”
Deloitte points out that the initiative “is based on the premise that poor data is impacting the bid/ask spread through the establishment of transaction platforms, and that if this can be solved, then this will further support the market”.
The success of this initiative, the auditor notes, “is highly dependent on the banks being required to put in place robust processes to capture and update the information on a regular basis, including that sourced from paper-based records”.